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Modern Money Theory, Social Sustainability, and Nick

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In the above video, Nick, otherwise known as The Modern Mystic, has raised an important question about applying Modern Money Theory (MMT) -based economics. He asks whether if all nations used MMT-based economics to achieve full employment, truly universal health care, and free public education for everyone, whether the world wouldn't run up against resource limits, and whether these limits along with competition for resources from everyone wouldn't cause resource price inflation?

Put another way, he is asking whether even if MMT-based, or as he calls it, “chartalist” economics, is rational at the “micro” level of the nation, it is also rational at the “sub-macro” level of a world system made up of interacting economies, national governments and interacting sovereign currencies, but no world fiscal authority? Or put still another way, is MMT-based economics, which may be fiscally sustainable in the short run in a single nation, both fiscally sustainable and socially sustainable in the longer-run in an international system of interacting, nations, currencies, and economies?

L. Randall Wray, Professor of Economics at University of Missouri, Kansas City kindly called my attention to Nick's youtube in an e-mail, and had this to say in answer to his question.

”. . . . Yes, every sovereign currency country in the world can use its monetary system to achieve full employment of all resources domestically, most importantly labor. Yes, if it tries to go beyond full employment it will drive up domestic resource prices; hence the Job Guarantee is the best way to get to full employment because it cannot go beyond.”

That is, as I interpret it, the Federal Job Guarantee (FJG) proposal of MMT thinkers contains a built-in normative constraint on government spending at the full employment level. In addition, since the movement to full employment will increase aggregate demand in the non-Government sector, jobs created there will move people out of FJG jobs and into those jobs, since they will need to offer better compensation than FJG jobs. As non-government sector employment increases and FJG jobs decrease in number, Government spending will also decline, making room for increased non-government sector spending without causing inflation. Randy Wray continues about Nick and his views:

“His question about exceeding resource constraints globally is legitimate but what he forgets is that we all have different currencies and we have to go across exchanges. Hence, Zimbabwe cannot pump up its domestic demand so high that it absorbs the globe's resources. It can buy anything for sale in its own currency, but that does not mean it can buy anything for sale somewhere on earth for some currency or other because Zimbabwe's access to other currencies is limited and there is not much around the world for sale for Zimbabwe's currency directly.

“Very large nations like the US and China can indeed run up global commodities prices and he is right to be concerned about equity issues. However, I am sure he will agree we are a very long way from global full employment of resources, and rising resource prices will increase flows, anyway.“

So, Zimbabwe, or any nation, may create aggregate demand sufficient to fully employ its own population and facilitate its people maximizing their creation of their own real wealth, but generating demand that goes beyond a nation's real wealth and potential to produce further wealth, will only result in higher domestic prices including higher prices in Zimbabwean currency for the resources it must import from others. So, there is a self-correcting factor in the system that would make it impossible for any nation to just create enough of its currency to corner all the globe's resources.

Also, Randy's reply about the legitimacy of equity issues and the ability of large nations to run up commodity prices, though qualified correctly by the point that we are very far way from global full employment, leaves open Nick, the Modern Mystic's, question about whether MMT would be sustainable in the long run, if every nation did MMT successfully. So, I'll address that now.

All of the world's economies and humankind generally, faces the problem of scarce, non-renewable, natural resources “running out” in finite time. The problem is there for MMT, and it is there for any of the competing schools of economics. Joebhed, another blogger, who attended the recent Fiscal Sustainability Teach-In Counter-Conference, emphasizes the point that Nick, in raising the resource and social sustainability questions isn't pointing to a problem that would be unique to MMT-based economies, if these existed. But rather is pointing to a problem that all schools of economics face.

Nick might reply to this point, by saying yes, but MMT-based economics makes this problem more acute, because its high aggregate demand approach, if followed all over the globe, would result in more and faster consumption of goods using scarce natural resources, than would a world where there were many more poor nations and people. This is a serious question, but I think MMT provides a ready answer to it. That answer goes back to one of its central ideas, which is that Government spending ought to be in the service of public purposes. Government spending, in other words, is for realizing certain valued outcomes, like full employment, truly universal health care, and public no-cost education for all. But that's not all. In a world where natural resources are scarce, running out, and inequitably distributed, it can't be part of the public purpose to get into increasingly serious conflicts with other nations over natural resources. Instead, the economy will have to be re-invented, so that its valued outcomes are socially sustainable, both domestically and internationally, and Government spending will have to be oriented as much toward realizing resource and social sustainability, as it is toward other outcomes.

And, if all the world's economies implemented MMT principles, all of the world's economies would also calculate the worth of the economy, it's value for society, in terms of its success in achieving sustainability, as well its success in realizing other valued outcomes. Nick, the Modern Mystic, in his assumption, that competition among MMT-based economies would necessarily grow competition for scarce resources is making the assumption that MMT-based economies would necessarily involve the production of valued outcomes that used more and more of these scarce resources. However, if MMT-based economies are successful, part of the wealth they will produce will be the capability to produce energy from virtually limitless rather than scarce resources, the ability to clean the environment and limit any future environmental damage, the ability to produce goods from re-cycled materials, and most generally the ability to produce wealth using fewer and renewable natural resources.

Whether this will happen or not is problematic. But MMT-based economies can make the choice to use Government spending to facilitate a transformation to that kind of society, rather than to facilitate the kind of growth that is unsustainable. Just a little while ago, my friend and co-author, Henk Hadders, writes from a Conference in Paris he's attending on sustainability and sustainable heath care systems, and he asks whether I or my MMT economist friends might react to the issue of the relationship between money and sustainability. I think I've already done a little bit of that here. But I'd like to do more by reacting to two questions of his, that perhaps Nick and Randy will be very interested in too. Henk asks (via e-mail):

”1. Under which conditions can decreasing economic growth in the richer parts of the world be made acceptable? How can well-being still increase while economic growth decreases. How to manage the distribution of income and capital (in the broadest sense as man-made, built, human and social capital) in a society that moves from growth to a "Steady State"?

”2. Under which conditions is a society under "Steady State" conditions able to "survive" without producing even more unemployment, economic crisis and poverty, than under the conditions of economic growth ?”

I think the concern about limits expressed in these questions is very important. But I also think that the assumption that the need to achieve a “steady state” in the use, consumption, and renewal of natural resources doesn't necessarily imply declining economic growth. Or to put this another way, economic growth does not equate to growth in the consumption of non-renewable natural resources, or in the too rapid consumption of natural resources. Since, I think both questions are ultimately based on that assumed equating, or at least on a close association between the two, they both beg the question of whether economic well-being and sustainability can increase together. I think that is the question we must answer, and also that the right answer is that it is possible for MMT-based economics to provide both of these valued outcomes.

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